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﻿﻿Support and Resistance Levels

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Support and resistance in MP Evans shares

In chart terms support refers to a price band or single share price that acts as a barrier preventing downside. It is an area where the share price struggles to fall below. Conversely, resistance is a price band or single share price that acts as a barrier preventing upside. It is an area when the share price struggles to surpass. Support and resistance are key concepts in trading stocks or finding levels to buy/sell at and once again they relate to the fundamentals of price movement. At resistance zones lots of investors are willing to sell and at support zones lots of investors are willing to buy.

Identifying support and resistance levels is often easier using candlestick charts as it also accounts for intra-day movements. As illustrated to the right is a basic example of support and resistance that led to the development of a horizontal trend. Resistance existed at 540p with support roughly 4% below this at 520p. In this case, the clear sell signal occurred in October. Further support can be drawn in at roughly 517p, but in both cases the price fell below indicating a downside breakout. The result was a fall towards 510p. Further resistance is actually present at around 525p. Looking closely at the chart, the price bounced multiple times off ~525p, but failed to break through - another bearish marker.

Types of Support and Resistance (S/R)

Declining support and resistance in Zincox shares

If a share is in a downward channel or upward channel, the upper trend line for the channel would represent resistance with the lower trend line representing support. Depending on whether the channel is going upward or downward, this would representing inclining or declining support/resistance and can also be used to determine a breakout as mentioned in part 1. When a share price pierces through resistance or support, it is often a signal to buy or sell the stock respectively. However, once again, caution should be advised - you should wait for sustained movement either side or the level to ensure that the breakout is not a false dawn.

A further type of S/R is round number S/R and this makes logical sense. Round number S/R involves numbers that are round (e.g. 100p and 200p). This is explained as follows. Investors use multiple types of trading strategies and these often involve a few techniques including:-stop losses (when a share is sold when a share moving downwards hits a certain level [to stop the loss])
- limit buys and sells (when a share is bought or sold at a certain share price automatically)
When an individual sets these share price levels for their stops and limits, they often choose round numbers (e.g. 300p as opposed to 289p). The result is that you get stop and limit bunching where multiple stops and limits exist at a certain price level and thus trigger in a row creating potent support or resistance. In addition, an investor may simply have a mental idea that they want to sell at a certain price. Once again round numbers are often chosen for this.

Round number support in ECR Minerals shares

Consider this concept in the case of ECR Minerals shares as shown. In this instance, 1p is the round number support. It is likely that investors will have placed buy orders at 1p or have had the idea to buy in just above 1p. The result is that each time the stock retraced to 1p, there is a surge in buying activity. This happened on 5 distinct occasions with multiple other occasions also present. The result was a band of support along the 1p level that held up for multiple consecutive months. In this case, the support eventually fell away in March 2012 and the shares declined in value materially. Round number support and resistance is inherently easy to identify. It is important to remember though that for shares with prices over 50p, S/R levels will be at larger intervals (e.g. 5p intervals) compared to shares with prices below 10p (e.g. 1p intervals).

Other types of support and resistance do exist. One of these is long-term moving average S/R. As moving averages do not track the exact share price, they fluctuate either side. Sometimes the moving average is below the share price when the share price dips and touches the moving average. Should the share price then rebound off the moving average, it can be said that the moving average has provided support. However, this is one of the less reliable S/R identifiers. Another type is major high and major low S/R. Historic peaks and troughs can generate resistance and support respectively. This is because investors may look to take profits/buy in anticipation of a downturn or upturn, as in the past the share price has failed to exceed/fall below that level.
As with trend lines, the length of time the S/R has been in place for, and the number of touches that the share price has had with the level all contribute to its reliability. The longer the period of time and the more touches, the more reliable the S/R will be and the more significant the breakout.

Can Support and Resistance switch?

Resistance to support in Debenhams shares

The answer to this is yes. On many occasions, levels that were previously support can turn to resistance if broken through and vice versa. One scenario is shown for Debenhams shares. In this case there is a band of S/R as opposed to just a single price level. In April 2012, the shares tested 80p on multiple occasions but failed to sustain a breakthrough. They eventually did in July. The shares rallied on upwards to as high as 120p following this as they were in a steep uptrend. In March 2013, the shares fell sharply off their highs and stabilised just above 80p in the same band that was previously resistance. This is because the switch has happened with the resistance turning to support as investors seek an attractive entry price. This type of S/R is less common as it requires a bullish period to precede or follow a bearish period such that the overall movement is minimal so that previous levels can be re-tested.

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